How Markets Work (Week 1)

Question 1

What are the 2 types of markets?

Answer 1

1. Primary = new market. Private or public offering. Exchange of cash between investor and issuers.
2. Secondary = markets that exist and exchange is done from investor to investor. Firm does NOT receive any cash

Question 2

What is the Bid-Ask Spread

Answer 2

The difference between the lowest sell price and highest buy price

Question 3

What are the 4 types of Market Orders? What are the 2 common ones?

Answer 3

1. Market Order = INSTANT execution but not instant price
2. Limit Orders = placing an order at a specified price –> guaranteed price but not guaranteed execution
3. Take profit orders
4. Stop Loss orders

Question 4

What are 3 costs incurred in trading?

Answer 4

1. Commission fees = fees paid to the broker
2. Bid-Ask Spread
3. Price impact = sudden movement caused by large trades

Question 5

What is ‘Buying on Margin’

Answer 5

Borrowing money from a broker to purchase securities. Margin is the % investor has contributed and the rest is a loan

Question 6

What does Initial Margin and Maintenance Margin mean?

Answer 6

Initial = difference between initial investment and loan values

MM = MNIMUM equity that must be achieved in investor’s portfolio

Question 7

What are the consequences if the Investor’s Equity < MM?

Answer 7

Broker will liquidate investor’s assets

Question 8

What does short-selling mean?

Answer 8

Borrowing stocks from lender for a fee and then selling it, speculating the price will later decrease. Once price has decreased as expected, we rebuy the stocks and return to the lender.

Question 9

What does HPR mean?

Answer 9

• The return received on an investment from start to finish